Value in the commuter zone

With rail fare increases and low interest rates eroding the financial benefits of moving further out, we ask the question, does commuting into London still make sense?

19 February 2013, Words by Sophie Chick

For many households, the need for more space and a less frenetic pace of life provides a powerful impetus to move out of London and into commuter territory. But the trade-off is a complex one, involving a balance between travelling distances, commuting costs and hassle on one hand, and more affordable house prices and lifestyle benefits on the other.

Moreover, the financial incentive to move out may have been eroded by the combination of rail fare increases – up 18% over the past three years – and the continuing ultra-low interest rate environment (which enables even relatively large London mortgages to be serviced manageably).

Commuter journeys are typically between 20 and 90 minutes long (commuter presence drops off rapidly for stations involving longer travel times), so our analysis has looked at house prices near London underground stations in zones two and three, compared with those around a sample of 174 commuter belt stations.

House price trade-offs

Even using a simple house price average (in other words leaving out the different housing stock make-up in an area), it’s clear, unsurprisingly, that housing is much more expensive in London than beyond it. The average house price in zone two is over £486,000, compared with £333,000 in the 20-30 minute commuter belt – a difference of more than £150,000

Average house prices continue to reduce as journey time lengthens, though more gradually and not consistently. Thus, for a train journey of 40-50 minutes you’ll find house prices averaging just over £260,000; but the location of expensive ‘honeypot’ towns such as Oxford and Winchester means the 50-60 minute average rises to £320,000. Accept an 80-90 minute commute and you’ll pay, on average, just £217,000 for a home.

Size matters

When the price differentials of different house sizes are taken into account, the picture becomes rather more nuanced. Most striking is the price gap between larger (four-bedroom) properties in London and those outside. A four-bedroom house averages £1.2 million in zone two; in the 20-30 minute commuting zone, in contrast, it’s just over £500,000, and that figure falls gradually to just over £360,000 in the 80-90 minute zone.

So the potential property cost reduction for a London-based family wanting a larger home and willing to accept a longer commute is considerable. Indeed, a move out to more distant commuter territory – often a decision based on lifestyle and education choices – could feasibly free up sufficient equity to fund major family commitments such as school fees, or a London bolthole that would make it easier to maintain links with the capital.

In contrast, for one-bedroom properties, the cost differential between London and the commuter belt is less dramatic (averaging £315,000 in zone two, falling to £145,000 in the 20-30 minute commuter zone). Moreover, there’s much less to be gained by a longer daily journey: even extending from a 30-minute to a 90-minute commute knocks less than £30,000 off the cost of a one-bedroom property.

Commuters on the bottom rungs of the housing ladder are therefore more likely to move out of London to cheaper commuter destinations, specifically to try and maximise price differences between the two locations.

Annual cost comparisons

Any house price savings must be set against the costs of commuting. An annual rail and underground season ticket now costs between £3,600 and £6,000, depending on the length of the journey. But comparisons are easier to make if the trade-off between travel and housing costs in different locations can be assessed on a like-for-like basis. We have therefore standardised housing costs, first, by calculating the interest payable on a 75% loan to value mortgage (at a rate of 3.75%) for an average four-bedroom property in each zone and adding that to the cost of the season ticket.

This analysis confirms the cost savings of a move from London out to the commuter belt – but emphasises there’s currently little additional financial benefit in accepting a longer commute. This is because although season ticket costs rise as the journey becomes longer, low mortgage interest rates mean there is relatively little difference in the cost of servicing the housing debt.

Mortgage interest on a typical four-bedroom property is only around £4,200 a year less in the 80-90 minute zone than in the 20-30 minute zone, and when higher travel costs are factored in, the cost advantage shrinks to around £2,000.

However, London’s higher house price effect means mortgage capital repayments are progressively more expensive in the nearer zones; when we build these repayments in, costs skew more decisively back in favour of a longer commute. Thus, on an 80-90 minute commute, the annual savings equate to £98 per minute for a four bedroom house (see Table 4.1).

Of course, cost savings vary according to local variations in house prices. For those London commuters game for a relatively lengthy journey, places such as Ely and Stowmarket offer particularly good value.

Zoning in or out?

In practice, in the face of economic uncertainty, a relatively strong London property market compared with surrounding areas, significant fare rises and low interest rates, there has been little incentive for those living in zones two and three to contemplate a move to the commuter belt. However, when mortgage rates start to move upwards, minds will be focused on the cost of London property – and the relative attractions of more affordable commuter belt locations.